Why Facebook Stock May Have Hit a Bottom

Facebook stock, which closed Tuesday down more than 26 percent from the initial public offering price, may be hitting something of a bottom.

Shares rose more than 3 percent to close at $32.00 on Wednesday after an analyst report describes the shares as a "buy."

And there is a lot of chatter in the market that underwriters may step in to support the stock to keep it above $30.

An analyst note out from Needham & Co. today describes the social network as “an option on the World.” Needham initiated coverage with a buy rating and a price target of $40 per share, a 29 percent premium to Tuesday’s closing price.

In their discussion of how to value Facebook, Needham’s analysts argue that “money follows time.”

Facebook’s ability to command eyeball time on the internet makes it likely to generate huge amounts of revenue, the analysts write.

Eventually the company could pass Google in revenue because users spend more time on Facebook than on Google’s pages, the note predicts.

Market watchers have been speculating that underwriters may provide additional support for Facebook shares, in order to keep the stock from falling below $30.

The underwriters oversold the shares in the IPO, making them technically short the stock. Buying shares at current levels in order to deliver them to customers would lock in a profit for the underwriters while also possibly preventing a potentially embarrassing further decline in the price.

Facebook shares could also get a boost as short-sellers buy shares to deliver them three days after the first full day of trading.

About 18 million shares of Facebook, or 1 percent of the outstanding shares, are on loan—an indication that they may be sold short. Short sellers are required to buy or borrow additional shares to deliver them to buyers three days after the initial short sale.

If short sellers choose to cover—that is, buy the shares in order to make delivery—this could provide some buoyancy to the stock price.